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U.S. offers 1% second-mortgage rates via modification plan

The Obama administration is trying yet another program to stem home foreclosures -- this time by offering lenders incentives to cut payments on second mortgages.

The taxpayer-funded plan aims to slash second-mortgage interest rates to as low as 1% for the next five years for qualifying borrowers.

The Treasury said the program would work in tandem with the Making Home Affordable plan it launched in February, which focused on incentives to get lenders to modify first mortgages for people who have a fighting chance of holding on to their homes.

The problem for many distressed homeowners is that they have both first and second mortgages -- and can’t afford either. Treasury now wants lenders and loan servicers to agree to modify both loans as part of a "comprehensive" solution.

"Up to 50% of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien," Treasury said in its announcement today.

Under the new program, the government would share lenders’ cost of reducing second-mortgage interest rates. For second-mortgage loans that amortize (those with monthly payments that include principal and interest) the loan rate would be cut to 1% for five years. For interest-only loans the rate would be cut to 2%.

Lenders also could opt to forgive a second mortgage entirely in exchange for a one-time government payment.

The Treasury estimated the plan could help up to 1.5 million second-mortgage borrowers, although it didn’t say how it arrived at that number.

In one example the Treasury provided, a homeowner with a $44,000 second-mortgage loan at 8.6% would see his monthly payment slashed from $349 to $155 with the new rate at 1%, for an annual savings of $2,336.

The risk with the new program: After five years, loan rates would step up again. This could be just another case of delaying foreclosure, not preventing it.